On January 20, 2014, the scheme administrators (the “Scheme Administrators”) for two insolvent London Market Insurers, The Orion Insurance Company PLC (“Orion” ) and The London and Overseas Insurance Company Limited (“L&O”) (collectively, the “Insurers”), issued a Practice Statement Letter (“PSL”) stating that they intend to propose an amending scheme of arrangement (the “Amending Scheme”). The Amending Scheme would convert the Insurers’ existing run-off scheme to a cut-off scheme and, subject to certain exceptions, impose a bar date on claims. Notably, the Insurers have been discussing the possibility of a cut-off scheme for nearly a decade and, in recent years, have refused to pay certain types of claims based on the potential for an Amending Scheme.
Cut-off schemes have been used by many insolvent London insurers in the past (e.g., KWELM and English & American), but notably the cut-off scheme that is being considered by the Insurers would be much more complex and include unprecedented features. In contrast to prior cut-off schemes, certain policyholders may have opt-out rights, certain types of claims may still be handled in run-off or may revert to run-off in the future, and certain policyholders may receive more than 100 percent of the value of their claims.
In light of this development, policyholders should take steps now to evaluate the contemplated Amending Scheme and protect their interests, including by determining whether to vote for or against the Amending Scheme. If a bar date is imposed, policyholders should take steps to file claims in advance in order to protect their interests.
Orion and L&O are insurance companies incorporated in England. The Insurers both ceased writing new business and entered run-off in 1992. In 1994, the Insurers went into liquidation as insolvent insurers. On March 7, 1997, the Insurers implemented a run-off scheme of arrangement (the “Original Scheme”). Pursuant to the Original Scheme, the Insurers have paid a percentage of established scheme liabilities (currently 58 percent).
Certain of the Insurers’ policies were written through the Institute of London Underwriters (the “ILU”) (“Qualifying ILU Policies” and each a “Qualifying ILU Policy”). Pursuant to the Original Scheme, a Qualifying ILU Policy is one that was signed and issued by the ILU with an inception date on or after August 28, 1970, for Orion, and on or after March 20, 1969, for L&O. The Original Scheme arguably does not provide clear guidance on whether certain policies fall within the scope of the ILU guarantee, but provides that policyholders have the right to inspect certain documents that provide additional detail concerning the scope of this guarantee. The Original Scheme provides that qualifying ILU policyholders (“Qualifying ILU Policyholders”) should receive 100% of their established scheme liabilities.
After 21 years of run-off and 16 years of operating under the Original Scheme, the Scheme Administrators believe that they have reached agreements on claims with respect to a majority of policyholder claims and that conversion to a cut-off scheme would be in the best interest of scheme creditors. Specifically, in the PSL, the Scheme Administrators recommend the implementation of the Amending Scheme because, if a bar date is not imposed, the estates would continue in run-off until at least 2035 and the Scheme Administrators would likely incur estimated administrative costs reaching $200 million or more. Additionally, the majority of the Insurers’ realizable assets have been collected. Significantly, the Scheme Administrators predict that the final payment percentage under the proposed Amending Scheme would be higher than under the Original Scheme.
III. Proposed Voting Classes
The Scheme Administrators intend to propose three classes of creditors, and a separate scheme meeting will be held for each class.
The first class consists of Qualifying ILU Policyholders, which are those policyholders with claims under the Qualifying ILU Policies described above. This class will receive 100 percent payment on agreed claims, plus a premium for early crystallization as an incentive to participate in the Amending Scheme, unless the policy limit is exceeded. The Qualifying ILU Policyholders will have the option to opt out of the Amending Scheme and have their claims handled in run-off under the Original Scheme. If greater than 30 percent by value of Qualifying ILU Policyholders opt out, the Amending Scheme will revert to the Original Scheme and run-off will continue for all policyholders.
The second class of creditors will consist of those policyholders who have notified the Insurers of outstanding claims and IBNR claims.
The final class of creditors includes both policyholders with future claims against the Insurers and non-insurance creditors.
Second- and third-class creditors do not receive a premium on their claims. In addition, for the second- and third-class policyholder creditors under L&O policies issued before March 20, 1969, a third party is responsible for certain amounts pursuant to a prior agreement with the Insurers. The Scheme Administrators caution that the third party “may not settle the amounts arising as a result of the crystallisation provisions of the Amending Scheme.” In that event, such policyholders could be placed back into the run-off scheme for the future claims if the third party disagrees with the valuation of such claims in the Amended Scheme. If a pre-1969 L&O policyholder is placed back in run-off, payment could be requested from the third party if and when the policyholder’s future claims are agreed to by the Insurers in the ordinary course. Any pre-1969 L&O policyholders that have agreed claims prior to the bar date will proceed under the provisions of the Amending Scheme.
IV. Timeline for Approval and Implementation of the Amended Scheme
According to the PSL, the Insurers will apply to the High Court of Justice in May 2014 for a convening hearing to request permission to conduct the policyholder scheme meetings for consideration of the Amending Scheme. The Amending Scheme would not be effective until it receives votes of 75 percent of the creditors (in value), who vote either in person or by proxy at each scheme meeting and are sanctioned by the Court. The Scheme Administrators intend to conduct the scheme meetings with policyholders and other creditors in the third quarter of 2014. The Insurers also encourage policyholders who do not attend the scheme meetings to vote on the Amending Scheme by proxy.
The Scheme Administrators expect that, if the Amending Scheme is approved, its effective date would be in the fourth quarter of 2014. If that occurs, under the current proposal, the bar date for the Amending Scheme would be eight months from the effective date, estimated to be in the second or third quarter of 2015. Finally, the intended completion date for the Amending Scheme is the end of 2017.
V. Settlement Agreements with Solvent London Market Insurers
Policyholders who have previously entered settlement agreements with solvent London Market Insurers, which allocate a portion of the settlement to either Orion or L&O, should seek an agreed claim with the Insurers. The process to reach an agreed claim may involve the Insurers obtaining the solvent London Market Insurers’ allocations from third-party actuaries.
In sum, policyholders should carefully review available claims information and consider a few actions at this time, including the submission of any claims they may have against the Insurers under the Original Scheme, seeking agreement with the Scheme Administrators on those claims in advance of the creditors’ voting meetings and determining whether it is in their interest to vote for the Amending Scheme.